Trade, Trump, Tariffs: Mexico Endures

Around the Curve

Trade, Trump, Tariffs: Mexico Endures

Despite current turmoil in global trade, Mexico's economy is showing resilience.

 

As investors navigate the tactical skirmishes of President Trump’s strategic battle on global trade, it’s worth taking a step back to observe how different countries are responding to changes in currency and interest rate values. And on this basis, Mexico’s external performance has been impressive.

Through the second quarter of 2019, Mexico generated a current account surplus of 1.0% of gross domestic product (GDP), its largest surplus in 30 years!
 

Source: Haver Analytics. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The goods trade balance is the highest since the Tequila Crisis in the mid-1990s; although Mexico’s energy balance has deteriorated in recent years, the manufacturing trade surplus has more than offset this weakness. Meanwhile, the services trade balance is the highest in 20 years as tourism has risen sharply—more Americans traveling south of the border and more Mexicans staying home—which is exactly what one might expect in response to the price signal from a weak currency.
 

Source: Haver Analytics. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Despite the ongoing existential fears around the fate of NAFTA, foreign direct investment flows have remained stable in recent years, leaving Mexico with a basic balance of payment1 surplus position it has not enjoyed—on any sustained basis—since the mid-2000s, a period when the currency was nearly 30% stronger than current levels, in real terms.

 

Source: Haver Analytics. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

Admittedly, this performance may not last. Given the volatility in trade data and given the ongoing slowdown in U.S. manufacturing surveys, Mexico’s trade position may weaken somewhat from current levels. Additionally, U.S. Congress has yet to pass USMCA and risks remain that impeachment proceedings against President Trump could delay any meaningful attempt to pass a NAFTA replacement until after the 2020 U.S. presidential election.

Nevertheless, Mexico’s trade balance, compared to its own history and compared to other emerging markets, is faring impressively well through the ups and downs of the global cycle in recent years. Looking through all the noise, the performance of Mexico’s external balance suggests the peso remains undervalued.


1 The basic balance of payments comprises the current account and capital account balances.

 

Definitions:

The tequila crisis refers to the sudden devaluation in the Mexican peso in 1994, which other Latin American currencies to decline and an economic crisis in Mexico and other Latin American nations.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

USMCA, NAFTA: The Agreement between the United States of America, the United Mexican States, and Canada is a signed but not ratified free trade agreement between Canada, Mexico, and the United States. It is referred to differently by each signatory—in the United States, it is called the United States–Mexico–Canada Agreement (USMCA); in Canada, it is officially known as the Canada–United States–Mexico Agreement (CUSMA) in English and the Accord Canada–États-Unis–Mexique (ACEUM) in French; and in Mexico, it is called the Tratado entre México, Estados Unidos y Canadá (T-MEC). The agreement is sometimes referred to as "New NAFTA"in reference to the previous trilateral agreement it is meant to supersede, the North American Free Trade Agreement (NAFTA).

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